Analysts from multiple firms have issued reports with their views about Burger King Worldwide Inc (NYSE:BKW) and Tim Hortons Inc. (TSE:THI) being in talks for a deal. Some analysts see tax savings, while others note that both companies would be able to leverage each other’s already existing footprints. Still others see few synergies in a deal.
Burger King, Tim Hortons helping each other
Analysts from most firms have noted that Tim Hortons could benefit greatly from Burger King’s global footprint, while Burger King could benefit from Tim Hortons’ reputation in Canada. UBS analyst Keith Siegner and his team said in their report that the synergies and cost savings opportunities could be “meaningful.” They note that Tim Hortons would be able to leverage Burger King’s wide presence and “master-franchise network” to speed up its global expansion.
For Burger King they think the potential opportunities for coffee, breakfast foods and snacks from Tim Hortons could strengthen its offerings in important areas. The UBS team thinks both food chains are underleveraged as well and suggests that a “significant payout ratio increase” and / or share buyback would help.
BMO Capital Markets analysts Peter Sklar and Emily Foo, on the other hand, say that the cost synergies from a combination could be limited. They note that both companies will operate as separate brands, so they think the synergies could be limited to “shared corporate services” and also savings from shared procurement. They have bumped up their price target for Tim Hortons from $74 to $79 per share.
Tax implications of a Burger King, Tim Hortons deal
On the topic of tax savings, the UBS team said while they do see tax savings, the bigger opportunity for a merged company will probably be long term. Headquartering the massive food chain in Canada, where Tim Hortons is located, will offer a lower corporate tax rate, but not much.
The UBS team says Burger King currently has a lower tax rate than Tim Hortons and note that much of the fast food chain’s current profits come from the U.S. As a result, they think that the tax benefit will be longer term as Burger King’s growing international operations could end up being repatriated to Canada’s lower tax rates.
An asset-lite model for Tim Hortons
In another report also dated Aug. 25, 2014, Morgan Stanley analysts John Glass and Jake Bartlett said they think the real motivation is turning Tim Hortons into an “asset-lite model,” which has worked well for Burger King. They note that under 3G ownership, Burger King has re-franchised almost all of its stores in the last two years. The result is a business with an “asset-lite royalty income stream” and EBITDA margins that skyrocketed from 18% almost up to 70%.
They don’t see tax savings as being a big deal for the companies, noting that the first reports indicated that this would be a motivating factor. They add that Tim Hortons’ current tax rate will likely be 29% this year, while they expect Burger King’s to be around 27% to 28%.